I have to park Rs 6 lac as Emergency fund.If I keep this amount in savings account I will get 4% interest but with 30% tax slab , effective Rate of interest may be 2.8% per annum.
If I keep this amount in Liquid fund I may get interest of 5 % per annum & tax deduction of 30%
My Query is
- As this is Emergency fund , I may not require the amount say for 2-3 years.In savings account at least I will get 2.8% interest which will be added in my savings annually & cumualative benefit will be there.
- In case of liquid fund , I will get amount only when I redeem the units but no annual interest like savings account.
Will I get 5% interest after 2 to 3 years ?
Let me know how liquid fund investment is better if investment is for 2-3 years.
Under Sec.80TTA, interest income from savings account up to the Rs.10,000 per year is tax-free. Hence, keep around Rs.2 lakh in savings account. By doing this, with tax-free mode of earning, your effective earning turn to be 4% itself.
Rest of the money you have to keep in liquid funds. Reason is that we can expect more than savings account interest rate. Also, if you held this money for more than 3 years (assuming you not faced any emergency during 3 years), then liquid funds give an edge over savings account.
I usually suggest like 1/3 in savings account, 1/3 in an eFD of a year and another 1/3 in liquid funds.
Parking emergency corpus means your concentration should be how fastly I can have access to fund rather than how much return I can generate.
From a returns perspective, saving accounts offer a low rate of return. Soon after demonetisation, banks have tremendously reduced the interest rates on savings accounts.
Banks are now offering an interest rate of as low as 4% on an account balance up to Rs 1 lakh. For those who maintain balances above Rs 1 lakh are offered differential interest rates. However, for small investors, it is challenging to avail such an opportunity.
On average, returns generated by liquid funds are in the range of 7% to 9%. Assuming that the tax rate is 30%, the post-tax return would be around 5% to 6%, which is relatively higher than the savings account.
You may consider a savings account as an alternative to generating a risk-free return. Moreover, you are assured of the interest being credited to your account. Most banks generally do not revise the interest rates on a savings account frequently.
However, liquid funds are not entirely risk-free. You may perceive them as low risk-low returns instrument. As they invest primarily in debt instruments, they might be subject to interest rate risk and credit risk.